BUSINESS ORGANIZATION II | BATCH 2 CASE DIGESTS

1. UMALI VS CA, GR NO. 89561

FACTS:

Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Mur Vda. de Castillo. The
Castillo family are the owners of parcel of land located in Lucena City which was given
as security for a loan from the development Bank of the Philippines (DBP) for their
failure to pay the amortization, foreclosure of the said property was about to be
initiated. This problem was made known to Santiago Rivera, who proposed to them the
conversion into subdivision of the four parcels of land adjacent to the mortgaged
property to raise the necessary fund. The idea was accepted by the Castillo family and
to carry out the project, a memorandum of agreement was executed by and between
Slobec Realty and Development Inc. represented by its president Santiago Rivera and
Castillo family. In this agreement, Santiago Rivera obliged himself to pay the Castillo
family the sum of P70,000 immediately after the execution of the agreement and to pay
additional amount of P40,000 after the property has been converted into a subdivision.
Rivera, with agreement approached Mr. Modesto Cervantes, president of defendant
Bormaheco and proposed to purchase from Bormaheco two tractors model D7 and D8
subsequently a sales agreement was executed on December 28, 1970. On January 3,
1971, Slobec, through Rivera, executed in favor of Bormaheco a chattel mortgage over
the said equipment as security for the payment of the aforesaid balance of P180,000. As
further security of the aforementioned unpaid balance, Slobec obtained from insurance
corporation of the Philippines a security bond, with Insurance Corporation of the
Philippines (ICP) as surety and Slobec as principal, in favor of Bormaheco, as borne out
of by Exhibit 8. The aforesaid surety bond was in turn secured by an agreement of
counter-guaranty with real estate mortgage executed by Rivera as President of Slobec
and Mauricia Mur Vda. de Castillo, Buenaflor Castillo Umali, Bertilla Castillo-Rada,
Victoria Castillo, Marietta Castillo and Leovina Castillo Jalbuena as mortgagors and
insurance corporation of the Philippines as mortgagee. In this agreement, ICP
guaranteed the obligation of Slobec with Bormaheco in the amount of P180,000. In
giving the bond, ICP required that the Castillos mortgage to them the properties in
question, namely, four parcels of land covered by TCT in the name of the
aforementioned mortgagors, namely TCT no. 13114, 13115, 13116, and 13117 all of
the Register of Deeds of Lucena City. Meanwhile, for violation of the terms and
conditions of the counter-guaranty agreement, the properties of the Castillos were
foreclosed by ICP as the highest bidder with a bid of P285,212, a certificate of sale was
issued by the provincial sheriff of Lucena City and TCT over the subject parcels of land
were issued.

Issue: Whether or not the foreclosure is proper so as to apply the doctrine of piercing

the veil of corporate entity.

Held: 

No. Under the doctrine of piercing the veil of corporate entity, when valid grounds
therefore exists, the legal fiction that a corporation is an entity with a juridical
personality separate and distinct from its members or stockholders may be
disregarded. In such cases, the corporation will be considered as a mere association of
persons. The members or stockholders of the corporation will be considered as the
corporation, that is, liability will attach directly to the officers and stockholders. The
doctrine applies when the corporate fiction is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, on when it is made as a shield to confuse the
BUSINESS ORGANIZATION II | BATCH 2 CASE DIGESTS

legitimate issues or where a corporation is the mere alter ego or business conduit of a
person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation.

In the case at bar, petitioners seek to pierce the veil of corporate entity of Bormaheco,
ICP and PM parts, alleging that these corporations employed fraud in causing the
foreclosure and subsequent sale of the real properties belonging to petitioners while
we do not discount the possibility of existence of fraud in the foreclosure proceeding,
neither are we inclined to apply the doctrine invoked by petitioners in granting the
relief sought. It is our considered opinion that piercing the veil of corporate entity is
not the proper remedy in order that the foreclosure proceeding may be declared a
nullity under the circumstances obtaining in the legal case at bar.

The mere fact, therefore, that the business of two or more corporations are interrelated
is not a justification for disregarding their separate personalities, absent sufficient
showing that the corporate entity was purposely used as a shield to defraud creditors
and third persons of their rights.
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2. KOPPEL VS YATCO, G.R. NO. L-47673

Facts:
·      Koppel Philippines Inc. (KPI) has a capital stock divided into thousand (1,000)
shares of P100 each.
·          The Koppel Industrial Car and Equipment Company (KICEC) owns 995 shares of the
total capital stock. KICEC is organized under US laws and not licensed to do business in the
Philippines. The remaining five (5) shares only were and are owned one each by officers
of the KPI.
·          They have the following business process:
o    (1) "When a local buyer was interested in the purchase of railway materials,
machinery, and supplies, it asked for price quotations from KPI";
o    (2) "KPI then cabled for the quotation desired from Koppel Industrial Car and
Equipment Company";
o    (3) "KPI, however, quoted to the purchaser a selling price above the figures
quoted by Koppel Industrial Car and Equipment Company";
o    (4) "On the basis of these quotations, orders were placed by the local purchasers
·          KPI paid under protest the P64,122.51 demanded by the CIR.
Total profit Php 3,772,403,82
KPI Share Php 132,201.30
KPI paid commercial broker’s tax (4% of KPI Php 5,288.05
Share)
CIR demanded (1% of Total Profit) + 25% Php 64,122.51
surcharge for late payment – Paid tax
·          It appears that KICEC is the only foreign principal of KPI.
·          The KPI corporation bore alone incidental expenses - as, for instance, cable
expenses-not only those of its own cables but also those of its "principal" .
·          The KPI's "share in the profits" realized from the transactions in which it intervened
was left virtually in the hands of KICEC
·          Where drafts were not paid by the purchasers, the local banks were instructed not
to protest them but to refer them to KPI which was fully empowered by KICEC to instruct
the banks with regards to disposition of the drafts and documents
·          Where the goods were European origin, consular invoices, bill of lading, and, in
general, the documents necessary for clearance were sent directly to KPI
·          If the KPI had in stock the merchandise desired by local buyers, it immediately
filled the orders of such local buyers and made delivery in the Philippines without the
necessity of cabling its principal in America either for price quotations or confirmation
or rejection of that agreed upon between it and the buyer 
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·          Whenever the deliveries made by KICEC were incomplete or insufficient to fill the
local buyer's orders, KPI used to make good the deficiencies by deliveries from its own
local stock, but in such cases it charged its principal only the actual cost of the
merchandise thus delivered by it from its stock and in such transactionsKPI did not
realize any profit #fluffypeaches
·          CFI:
o    KPI is a mere dummy or branch ("hechura") of KICEC.
o    did not deny legal personality to Koppel (Philippines), Inc. for any and all purposes,
but in effect its conclusion was that, in the transactions involved herein, the public
interest and convenience would be defeated and what would amount to a tax
evasion perpetrated, unless resort is had to the doctrine of "disregard of the
corporate fiction."
Issues/Ruling:
1. WON KPI is a domestic corporation distinct and separate from, and not a mere
branch of KICEC

KPI:
·          Its corporate existence as cannot be collaterally attacked and that the
Government is estopped from so doing.
SC:
·          Koppel (Philippines), Inc. was a mere branch or agency or dummy ("hechura") of
Koppel Industrial Car and Equipment Co. The lower court did not hold that the
corporate personality of KPI would also be disregarded in other cases or for other
purposes. It would have had no power to so hold. The courts' action in this regard must
be confined to the transactions involved in the case at bar "for the purpose of adjudging
the rights and liabilities of the parties in the case. They have no jurisdiction to do
more."  <3 peaches

·          United States vs. Milwaukee Refrigeration Transit

o    General Rule: a corporation will be looked upon as a legal entity as a general rule,
and until sufficient reason to the contrary appears;
o    Exception: The notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an
association of persons.
·          Manifestly, the principle is the same whether the "person" be natural or artificial.
·          A very numerous and growing class of cases wherein the corporate entity is
disregarded is that (it is so organized and controlled, and its affairs are so conducted,
as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation)." 
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·          Where it appears that two business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when necessary to protect the
rights of third persons, disregard the legal fiction that two corporations are distinct
entities, and treat them as identical. (Abney vs. Belmont Peaches Country Club
Properties, Inc., 279 Pac., 829.)  #bebegurrpeaches
·          The fact that KPI is a mere branch is conclusively borne out by the fact, among
others, that the amount of the so-called "share in the profits" of KPIwas ultimately
left to the sole, unbridled control of KICEC. If KPI was intended to function as a bona
fide separate corporation, we cannot conceive how this arrangement could have been
adopted.
·          No group of businessmen could be expected to organize a mercantile corporation
if the amount of that profit were to be subjected to such a unilateral control of another
corporation, unless indeed the former has previously been designed by the
incorporators to serve as a mere subsidiary, branch or agency of the latter. 

·          KPI charged the parent corporation no more than actual cost - without profit
whatsoever - for merchandise allegedly of its own to complete deficiencies of
shipments made by said parent corporation.
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3. LIPAT VS PACIFIC BANKING CORP. G.R. NO. 142435

FACTS:

Petitioner spouses Lipat owned Bela’s Export Trading (BET) a single proprietorship
engaged in the manufacture of garments for domestic and foreign consumption. The
spouses by virtue of an SPA appointed and authorized their daughter to obtain loan from
respondent Pacific Bank. A loan was secured and as security therefore a REM was
executed over the property of the spouses. Sometime after, BET was incorporated into a
family corporation named Bela’s Export Corporation (BEC) and the loan was restructured
in its name. Subsequent loans were obtained in behalf of BEC all secured by the previous
REM. BEC defaulted in its payments which led to the foreclosure and sale of the mortgaged
property. The spouses moved to annul the sale alleging that BEC is a distinct and separate
personality from them and that the REM was executed only to secure BET’s loan. Both trial
court and CA ruled to pierce the corporate veil to hold petitioner spouses liable for BEC’s
obligations.

ISSUE:

Whether or not the doctrine of piercing the veil of corporate fiction is applicable in this
case.

RULING: YES.

We find that the evidence on record demolishes, rather than buttresses, petitioners’
contention that BET and BEC are separate business entities. Note that Estelita Lipat
admitted that she and her husband, Alfredo, were the owners of BET and were two of the
incorporators and majority stockholders of BEC. It is also undisputed that Estelita Lipat
executed a special power of attorney in favor of her daughter, Teresita, to obtain loans and
credit lines from Pacific Bank on her behalf. Incidentally, Teresita was designated as
executive-vice president and general manager of both BET and BEC, respectively.

It could not have been coincidental that BET and BEC are so intertwined with each other
in terms of ownership, business purpose, and management. Apparently, BET and BEC are
one and the same and the latter is a conduit of and merely succeeded the former.
Petitioners’ attempt to isolate themselves from and hide behind the corporate personality
of BEC so as to evade their liabilities to Pacific Bank is precisely what the classical doctrine
of piercing the veil of corporate entity seeks to prevent and remedy.

In our view, BEC is a mere continuation and successor of BET and petitioners cannot
evade their obligations in the mortgage contract secured under the name of BEC on the
pretext that it was signed for the benefit and under the name of BET. We are thus
constrained to rule that the Court of Appeals did not err when it applied the
instrumentality doctrine in piercing the corporate veil of BEC.
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4. FRANCISCO VS MEJIA G.R. NO. 141617

FACTS: Andrea Cordova Vda. de Gutierrez (Gutierrez) was the registered owner of a
parcel of land in Camarin, Caloocan City. Gutierrez and Cardale Financing and Realty
Corporation (Cardale) executed a Deed of Sale with Mortgage relating to the lots for the
consideration of P800,000.00.
Owing to Cardale's failure to settle its mortgage obligation, Gutierrez filed a complaint for
rescission of the contract. However, Cardale, which was represented by petitioner Adalia
B. Francisco (Francisco) in her capacity as Vice-President and Treasurer of Cardale, lost
interest in proceeding with the presentation of its evidence and the case lapsed into
inactive status for a period of about fourteen years.
In the meantime, the mortgaged parcels of land became delinquent in the payment of real
estate taxes which culminated in their levy and auction sale in satisfaction of the tax
arrears. The highest bidder for the three parcels of land was petitioner Merryland
Development Corporation (Merryland), whose President and majority stockholder is
Francisco.
Thereafter, Francisco filed an undated Manifestation to the effect that the properties
subject of the mortgage had been levied upon and sold at a tax delinquency sale. Francisco
further claimed that the delinquency sale had rendered the issues in Civil Case moot and
academic.
Mejia, in her capacity as executrix of the Estate of Gutierrez, filed with the RTC of Quezon
City a complaint for damages with prayer for preliminary attachment against Francisco,
Merryland and the Register of Deeds of Caloocan City.
The RTC held that plaintiff Mejia, as executrix of Gutierrez's estate, failed to establish by
clear and convincing evidence her allegations that Francisco controlled Cardale and
Merryland and that she had employed fraud by intentionally causing Cardale to default in
its payment of real property taxes on the mortgaged properties so that Merryland could
purchase the same by means of a tax delinquency sale.
There are times when the corporate fiction will be disregarded: (1) where all the members
or stockholders commit illegal act; (2) where the corporation is used as dummy to commit
fraud or wrong; (3) where the corporation is an agency for a parent corporation; and (4)
where the stock of a corporation is owned by one person.
The RTC held that none of the foregoing reasons can be applied to the incidents in this
case and the stock of either of the two corporation is not owned by one person (defendant
Francisco). Except for defendant Adalia B. Francisco, the incorporators and stockholders
of one corporation are different from the other.
The Court of Appeals, reversed the trial court, holding that the corporate veil of Cardale
and Merryland must be pierced in order to hold Francisco and Merryland solidarily liable
since these two corporations were used as dummies by Francisco.
ISSUE #1: Whether or not petitioner Francisco acted in bad faith in her dealings.
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HELD: YES. The Court, after an assiduous study of this case, is convinced that the totality
of the circumstances appertaining conduce to the inevitable conclusion that petitioner
Francisco acted in bad faith.
Not only did Francisco allow the auction sale to take place, but she used her other
corporation (Merryland) in participating in the auction sale and in acquiring the very
properties which her first corporation (Cardale) had mortgaged to Gutierrez.
It is dicta in corporation law that a corporation is a juridical person with a separate and
distinct personality from that of the stockholders or members who compose it. However,
when the legal fiction of the separate corporate personality is abused, such as when the
same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the
corporate veil. If any general rule can be laid down, in the present state of authority, it is
that a corporation will be looked upon as a legal entity as a general rule, and until
sufficient reason to the contrary appears; but, when the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud, or defend crime, the law will
regard the corporation as an association of persons.
Under the doctrine of piercing the veil of corporate entity, when valid grounds
therefore exist, the legal fiction that a corporation is an entity with a juridical personality
separate and distinct from its members or stockholders may be disregarded. In such cases,
the corporation will be considered as a mere association of persons. The members or
stockholders of the corporation will be considered as the corporation, that is, liability will
attach directly to the officers and stockholders. The doctrine applies when the corporate
fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime,
or when it is made as a shield to confuse the legitimate issues, or where a corporation is
the merealter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.
It is exceedingly apparent to the Court that the totality of Francisco's actions clearly betray
an intention to conceal the tax delinquencies, levy and public auction of the subject
properties from the estate of Gutierrez and the trial court in Civil Case No. Q-12366 until
after the expiration of the redemption period when the remotest possibility for the
recovery of the properties would be extinguished. Consequently, Francisco had effectively
deprived the estate of Gutierrez of its rights as mortgagee over the three parcels of land
which were sold to Cardale.
ISSUE #2: Whether or not Merryland may be held solidarily liable with Francisco.
HELD: NO. We cannot agree, however, with the Court of Appeals' decision to hold
Merryland solidarily liable with Francisco. The only act imputable to Merryland in relation
to the mortgaged properties is that it purchased the same and this by itself is not a
fraudulent or wrongful act. No evidence has been adduced to establish that Merryland was
a mere alter ego or business conduit of Francisco.
Time and again it has been reiterated that mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate personality. Neither has it been
alleged or proven that Merryland is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of Cardale.
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Even assuming that the businesses of Cardale and Merryland are interrelated, this alone is
not justification for disregarding their separate personalities, absent any showing that
Merryland was purposely used as a shield to defraud creditors and third persons of their
rights.32 Thus, Merryland's separate juridical personality must be upheld.
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5. NAMARCO VS ASSOCIATED FINANCE COMPANY, G.R. NO. L-20886

FACTS:
In 1958, National Marketing Corporation (NAMARCO) entered into an agreement with
Associated Finance Company, Inc. (AFCI). NAMARCO was represented by its general
manager Benjamin Estrella. AFCI was represented by its president Francisco Sycip. The
agreement was that NAMARCO will deliver raw sugar to AFCI. In exchange, AFCI will
deliver refined sugar to NAMARCO. NAMARCO delivered the raw sugar but AFCI failed
to comply with its obligation. NAMARCO then demanded AFCI to comply or if not pay
the amount of the raw sugar delivered which was at P403,514.28. AFCI was not able to
do either hence NAMARCO sued AFCI and Sycip was impleaded.
ISSUE: Whether or not Sycip should be held jointly and severally liable with Associated
Finance Company, Inc.
HELD:
Yes. In this case, it is proper to pierce the veil of corporate fiction. It was proven that
during the time of the agreement, AFCI was already insolvent. Such fact was already
known to Sycip. He knew that AFCI was not in a position to transact with NAMARCO
because it could not possibly comply with its obligations. Sycip’s assurances that AFCI
can deliver said refined sugar products is obviously fashioned to defraud NAMARCO
into delivering the raw sugar to AFCI. Consequently, Sycip cannot now seek refuge
behind the general principle that a corporation has a personality distinct and separate
from that of its stockholders and that the latter are not personally liable for the
corporate obligations. He is therefore liable jointly and severally with AFCI to pay the
amount claim for the raw sugar delivered plus other damages claimed by NAMARCO
with interest.
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6. Villa Rey Transit vs Ferrer GR No. L-23893

29 October 1968 | En Banc, Angeles (J): 6 concur, 2 took no part, 1 on leave
FACTS:
Jose Villarama was an operator of a bus transportation pursuant to two certificates of
public convenience granted him by the Public Service Commission (PSC). Later, he sold
the certificates to the Pangasinan Transportation Company, Inc. (Pantranco) with the
condition that the seller (Villarama) “shall not for a period of 10 years, apply for any
TPU service identical or competing with the buyer.”
Barely three months thereafter, a corporation called Villa Rey Transit, Inc. (the
Corporation) was organized with a capital stock of P500,000.00 divided into 5,000
shares of the par value of P100.00 each; P200,000.00 was the subscribed stock;
Natividad Villarama (wife of Jose Villarama) was one of the incorporators, and she
subscribed for P1,000.00; the balance of P199,000.00 was subscribed by the brother
and sister-in-law of Jose Villarama; of the subscribed capital stock, P105,000.00 was
paid to the treasurer of the corporation, Natividad.
In less than a month after its registration with the SEC, the Corporation bought five
certificates of public convenience and 49 buses from one Valentin Fernando. Later, the
Sheriff of Manila levied on 2 of the 5 certificates, in favor of Eusebio Ferrer, judgment
creditor, against Fernando, judgment debtor. A public sale was conducted. Ferrer was
the highest bidder. Ferrer sold the two certificates to Pantranco.
The Corporation filed a complaint against Ferrer, Pantranco and the PSC for the
annulment of the sheriff’s sale. Pantranco, on its part, filed a third-party complaint
against Villarama, alleging that Villarama and/or the Corporation was disqualified from
operating the two certificates in question by virtue of the previous agreement. The trial
court declared null and void the sheriff’s sale of two certificates of public convenience
in favor of Ferrer and the subsequent sale thereof by the latter to Pantranco and
declaring Villa Rey Transit, Inc., to be the lawful owner of the said certificates of public
convenience.
Pantranco disputes the correctness of the decision insofar as it holds that Villa Rey
Transit, Inc. (Corporation) is a distinct and separate entity from Villarama. Ferrer, for
his part, challenges the decision insofar as it holds that the sheriff’s sale is null and
void.
ISSUE:
Whether or not the stipulation between Villarama and Pantranco binds Villa Rey
Transit, Inc.
RULING:
YES.
The restrictive clause in the contract entered into by the Villarama and Pantranco is
also enforceable and binding against the said Corporation. The rule is that a seller or
promisor may not make use of a corporate entity as a means of evading the obligation
of his covenant. The evidence has disclosed that Villarama, albeit was not an
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incorporator or stockholder of the Corporation, his wife, however, was an incorporator

and was elected treasurer of the Corporation.
The evidence further shows that the initial cash capitalization of the corporation
was mostly financed by Villarama; he supplied the organization expenses and the
assets of the Corporation, such as trucks and equipment; there was no actual payment
by the original subscribers of the amounts of P95,000.00 and P100,000.00 as appearing
in the books; Villarama made use of the money of the Corporation and deposited them
to his private accounts; and the Corporation paid his personal accounts. The foregoing
circumstances are strong persuasive evidence showing that Villarama has been too
much involved in the affairs of the Corporation to altogether negate the claim that he
was only a part-time general manager. They show beyond doubt that the Corporation is
his alter ego.
The doctrine that a corporation is a legal entity distinct and separate from the
members and stockholders who compose it is recognized and respected in all cases
which are within reason and the law. When the fiction is urged as a means of
perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, the achievement or perfection of a monopoly
or generally the perpetration of knavery or crime, the veil with which the law covers
and isolates the corporation from the members or stockholders who compose it will be
lifted to allow for its consideration merely as an aggregation of individuals. 
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7. La Campana Factory vs KAISAHAN NG MANGGAGAWA (KKM)

G.R. L-5677, May 25, 1953
Facts:
Tan Tong has been engaged in the business of buying and selling gaugau under the
trade name La Campana Gaugau Packing since 1932. In 1950, Tan Tong and his family
members formed a corporation known as La Campana Starch and Coffee Factory Co.,
Inc., with its principal office located in the same place as that of La Campana Gaugau
Packing in Espana Extension, Quezon City.
A year before the formation of the corporation, Tan Tong had entered into a
collective bargaining agreement with Philippine Legion of Organized Workers (PLOW).
Seceding from said union was respondent Kaisahan Ng Mga Manggagawa Sa La
Campana (Kaisahan) which applied for registration with the Department of Labor as an
independent entity. Later, respondent Kaisahan demanded, among others, for higher
wages and to be addressed as La Campana Starch and Coffee Factory as a combination
of both La Campana Gaugau Packing and the La Campana Coffee Factory Co. claiming
that they are the same entity. Herein petitioner sought for the dismissal of the case
insisting they are different entities and that the CIR had no jurisdiction over
respondent since the permit issued by the DOLE was revoked during the pendency of
the case.
The CIR ruled in favor of Kaisahan and held that there is only one management for
the business of gaugau and coffee with whom the laborers are dealing regarding their
work. The filing of action against the La Campana Starch and Coffee Factory is proper
and justified. Petitioners appealed to the CA.
Issue:
W/N La Campana Gaugau Packing and La Campana Coffee Factory Co. Inc., are one
and the same entity -- YES
Ruling:
La Campana Gaugau Packing and La Campana Coffee Factory Co. Inc., are operating
under one single management, that is, as one business though with two trade names.
True, the coffee factory is a corporation and, by legal fiction, an entity existing separate
and apart fro the persons composing it, that is, Tan Tong and his family. But it is settled
that this fiction of law, which has been introduced as a matter of convenience and to
subserve the ends of justice cannot be invoked to further an end subversive of that
purpose.
The doctrine that a corporation is a legal entity existing separate and apart from the
person composing it is a legal theory introduced for purposes of convenience and to
subserve the ends of justice. The concept cannot, therefore, be extended to a point
beyond its reason and policy, and when invoked in support of an end subversive of this
policy, will be disregarded by the courts. Thus, in an appropriate case and in
furtherance of the ends of justice, a corporation and the individual or individuals
owning all its stocks and assets will be treated as identical, the corporate entity being
disregarded where used as a cloak or cover for fraud or illegality.
BUSINESS ORGANIZATION II | BATCH 2 CASE DIGESTS

A subsidiary or auxiliary corporation which is created by a parent corporation

merely as an agency for the latter may sometimes be regarded as identical with the
parent corporation, especially if the stockholders or officers of the two corporations
are substantially the same or their system of operation unified.
In the present case Tan Tong appears to be the owner of the gaugau factory and the
coffee factory, though an incorporated business, is in reality owned exclusively by Tan
Tong and his family. As found by the CIR, the two factories have but one office, one
management and one payroll, except after the day the case was certified to the CIR,
when the person who was discharging the office of cashier for both branches of the
business began preparing separate payrolls for the two. Above all, as also found by the
CIR, the laborers of the gaugau factory and the coffee factory were interchangeable,
that is, the laborers from the gaugau factory were sometimes transferred to the coffee
factory and vice-versa. In view of all these, the attempt to make the two factories
appear as two separate businesses, when in reality they are but one, is but a device to
defeat the ends of the law (the Act governing capital and labor relations) and should
not be permitted to prevail.
Petition is DENIED.
Doctrine: A subsidiary or auxiliary corporation which is created by a parent corporation
merely as an agency for the latter may sometimes be regarded as identical with the
parent corporation, especially if the stockholders or officers of the two corporations are
substantially the same or their system of operation unified. Notes: The Court added
that despite the revocation of Kaisahan’s permit because the DOLE found that the
union was dominated by subversive elements, the CIR still acquired jurisdiction because
once jurisdiction is acquired by the CIR whent the permit was not yet revoked, it is
retained until the case is completely decided.
 8. Yutivo and Sons Hardware vs CTA, G.R. No. L-13203
Facts:
Yutivo, a domestic corporation incorporated in 1916 under Philippine laws, was
engaged in the importation and sale of hardware supplies and equipment. After the
first world war, it resumed its business and bought a number of cars and trucks
from General Motors(GM), an American Corporation licensed to do business in the
Philippines.
On June 13, 1946, the Southern Motors Inc,(SM) was organized to engage in the
business of selling cars, trucks and spare parts. One of the subscribers of stocks during
its incorporation was Yu Khe Thai, Yu Khe Siong and Hu Kho Jin, who are sons of Yu
Tiong Yee, one of Yutivo’s founders.
After SM’s incorporation and until the withdrawal of GM from the Philippines, the cars
and trucks purchased by Yutivo from GM were sold by Yutivo to SM which the latter
sold to the public.
Yutivo was appointed importer for Visayas and Mindanao by the US
manufacturer of cars and trucks sold by GM. Yutivo paid the sales tax prescribed
on the basis of selling price to SM. SM paid no sales tax on its sales to the public.
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An assessment was made upon Yutivo for deficiency sales tax. The Collector of Internal
Revenue, contends that the taxable sales were the retail sales by SM to the public and
not the sales at wholesale made by Yutivo to the latter inasmuch as SM and Yutivo were
one and the same corporation, the former being a subsidiary of the latter.
The assessment was disputed by petitioner. After reinvestigation, a second assessment
was made, sustaining the validity of the first assessment. Yutivo contested the second
assessment, alleging that there is no valid ground to disregard the corporate
personality of SM and to hold that it is an adjunct of petitioner.
Issue:
Whether or not the corporate personality of SM could be disregarded.
Held:
Yes. A corporation is an entity separate and distinct from its stockholders
and from other corporations to which it may be connected. However, when the
notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation as an
association of persons, or, in the case of two corporations, merge them into one. When
the corporation is a mere alter ego or business conduit of a person, it may be
disregarded.
SC ruled that CTA was not justified in finding that SM was organized to defraud the
Government. SM was organized in June 1946, from that date until June 30, 1947, GM
was the importer of the cars and trucks sold to Yutivo, which in turn was sold to SM.
GM, as importer was the one solely liable for sales taxes. Neither Yutivo nor SM was
subject to the sales taxes. Yutivo’s liability arose only until July 1, 1947 when it became
the importer. Hence, there was no tax to evade.
However, SC agreed with the respondent court that SM was actually owned and
controlled by petitioner. Consideration of various circumstances indicate that Yutivo
treated SM merely as its department or adjunct:
a. The founders of the corporation are closely related to each other by blood and
affinity.
b. The object and purpose of the business is the same; both are engaged in sale of
vehicles, spare parts, hardware supplies and equipment.
c. The accounting system maintained by Yutivo shows that it maintained high degree of
control over SM accounts.
d. Several correspondences have reference to Yutivo as the head office of SM. SM may
even freely use forms or stationery of Yutivo.
e. All cash collections of SM’s branches are remitted directly to Yutivo.
f. The controlling majority of the Board of Directors of Yutivo is also the controlling
majority of SM.
g. The principal officers of both corporations are identical. Both corporations have a
common comptroller in the person of Simeon Sy, who is a brother-in- law of Yutivo’s
president, Yu Khe Thai.
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h. Yutivo, financed principally the business of SM and actually extended all the credit to
the latter not only in the form of starting capital but also in the form of credits extended
for the cars and vehicles allegedly sold by Yutivo to SM.
 9. TELEPHONE ENGINEERING AND SERVICE CO INC (TESCO) v. WORKMEN’S
COMPENSATION COMMISSION (WCC)
No. L-28694; 13May1981 | J. Melencio-Herrera
Topic: Piercing the veil of corporate fiction in compensation cases
Case: Petition for certiorari from the award of the Workmen’s Compensation Section
FACTS:
TESCO is a domestic corporation engaged in telephone manufacturing, with sister
company, Utilities Management Corporation (UMACOR). Both companies are under the
management of Jose Louis Santiago, as Exec VP and General Manager.
UMACOR employed Pacifico Gatus as Purchasing Agent in 1964. He was assigned in
TESCO for 2.5 months, and reported back to UMACOR. In 1967, he contracted an illness
and died eventuall of “liver cirrhosis with malignant degeneration”.
Pacifico’s widowed wife, Leonila Gatus, filed a Notice and Claim for Compensation with
the Workmen’s Compensation Section alleging the employment of Pacifico under
TESCO and his death of liver cirrhosis. The Notice and Claim was transmitted to TESCO,
to which TESCO responded with an Employer’s Report of Accident or Sickness, signed
by Santiago, stating that UMACOR was Pacifico’s employer, and that employer
UMACOR would not controvert the claim for compensation, and admitted that the
deceased employee contracted illness “in regular occupation”. Thus, the Acting Referee
awarded death benefits (5,759) and burial expenses (200) in favor of Pacifico’s heirs.
TESCO filed a Motion for Reconsideration and Petition to Set Aside Award alleging that
the admission in the Employer’s Report was due to honest mistake and excusable
negligence, and that the illness for which compensation is sought is not an occupational
disease, hence, not compensable under the law. The MR was denied.
The Provincial Sheriff levied on and attached the properties of TESCO and scheduled
the sale of such at public auction. Hence, this petition seeking to annul the award and to
enjoin the Sheriff from levying and selling its properties at public auction.
In its Petition, TESCO asserts that there is no employer-employee relationship
between it and Pacifico Gatus.

ISSUE:
Whether TESCO is liable for the compensation claim of Pacifico’s heirs when it claims
that it is not the employer of Pacifico.

HELD/RATIO.
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YES, the assertion of lack employer-employee relationship cannot be admitted at the

point of the petition before the Supreme Court anymore; the difference between the
corporate personality of TESCO and UMACOR cannot be admitted anymore to confuse
the legitimate issues in this case.
In TESCO’s pertinent documents – letter to Acting Referee, Motion for Reconsideration
and Petition to Set Aside Award, and Urgent Motion to Compel the Referee to Elevate
Records to Commission for Review – it represented and defended itself as the employer
of the deceased. Nowhere in the said documents did it allege that it was not the
employer. TESCO even admitted that it and UMACOR are sister companies operating
under one single management and housed in the same building. Although respect for
the corporate personality as such, is the general rule, there are exceptions. In
appropriate cases, the veil of corporate fiction may be pierced as when the same is
made as a shield to confuse the legitimate issues.

 
10. Cano vs CIR, G.R. No. L-20502, Februaury 26, 1965
FACTS:
Emilio Cano Enterprises, Inc. (ECE) is a closed family corporation where the
incorporators and directors belong to one single family. Its incorporators are Emilio
Cano, his wife Juliana, his sons Rodolfo and Carlos, and his daughter-in-law Ana D.
Cano.
A complaint for Illegal Dismissal was filed against it. Emilio, Ariston and Rodolfo
were made respondents in their capacity as president and proprietor, field supervisor
and manager, respectively, of Emilio Cano Enterprises, Inc.
EMILIO and RODOLFO were held guilty of the crime charged while ARISTON was
absolved for insufficiency of evidence.
EMILIO AND RODOLFO were ordered, jointly and severally, to reinstate Honorata
Cruz, to her former position with payment of backwages.
EMILIANO CANO died on November 14, 1958. The attempt to have the case against
him dismissed failed, so it was elevated to the Court of Appeals which affirmed the
decision of the trial court. An order of execution, directed against the properties of EC
instead of those of the respondents named in the decision, was issued.
ECE moved to quash the writ on the ground that the judgment sought to be enforced
was not rendered against it which is a juridical entity separate and distinct from its
officials.
ISSUE:
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Can the judgment rendered against EMILIO and RODOLFO CANO in their capacity as
officials of the corporation Emilio Cano Enterprises, Inc. be made effective against the
property of the latter which was not a party to the case?
RULING:
It is an undisputed rule that a corporation has a personality separate and distinct
from its members or stockholders because of a fiction of the law. However, ECC is a
CLOSED FAMILY CORPORATION.
Here is an instance where the corporation and its members can be considered as
one.
To hold such entity liable for the acts of its members is not to ignore the legal fiction
but merely to give meaning to the principle that such fiction cannot be invoked if its
purpose is to use it as a shield to further an end subversive of justice. And so it has
been held that while a corporation is a legal entity existing separate and apart from the
persons composing it, that concept cannot be extended to a point beyond its reason
and policy, and when invoked in support of an end subversive of this policy it should
be disregarded by the courts.
EMILIO AND RODOLFO CANO are here indicted, not in their private capacity, but as
president and manager, respectively, of Emilio Cano Enterprises, Inc. Having been sued
officially their connection with the case must be deemed to be impressed with the
representation of the corporation. In fact, the court's order is for them to reinstate
Honorata Cruz to her former position in the corporation and incidentally pay her the
wages she had been deprived of during her separation. Verily, the order against them is
in effect against the corporation.
No benefit can be attained if this case were to be remanded to the court a quo
merely in response to a technical substitution of parties for such would only cause an
unwarranted delay that would work to Honorata's prejudice. This is contrary to the
spirit of the law which enjoins a speedy adjudication of labor cases disregarding as
much as possible the technicalities of procedure.